Module VI· Interest Calculation MechanicsIntermediate
Question

How do you model stub-period interest using half-year convention?

Answer

Prorate annual interest by the fraction of the year outstanding. If debt is issued mid-year, use period fraction or half-year convention as a simplification. Formula: debt balance x annual rate x stub fraction. For acquisitions, interest starts at closing, so year-1 interest should match the stub period rather than a full year.